By Kendall and Sharon Hoyd
Keeping books and records that are sound and faithful to what is true is a critical underpinning–“table stakes.” But strategic finance does not stop there. To help you imagine what could be, here’s a continuum of finance department performance in the critical area of financial reporting. The range is from the slightly harmful “misleading” to the much-desired “strategic.” Compare where you are now with what’s described in Stage 5.
Stage 1: Misleading In this state, the key data collection and accounting processes such as inventory counts, receiving, payables, and revenue and expense recognition are unreliable. That causes the income statement to whipsaw from one month to the next. These financial statements are only “accurate” when several months are totaled or averaged. Financial statements are often late, and information contained in them is no longer relevant to the current situation.
Stage 2: Stable Information is accurate on a monthly basis, but the content is purely financial. You may have a good idea how much money you made or how much inventory you have, but there’s no additional insight as to why or how. Financial statements are not late, but still aren’t complete until well into the following month.
Stage 3: Informative In this stage, we have a useful description of what happened last month. We see percentages and ratios that are compared to budget and prior period(s) and variances are explained but the explanations are often vague or generic. Financial statements are delivered within a few days of the end of the month with all the variance analysis and explanations.
Stage 4: Diagnostic Margins and ratio changes are explained in operational terms. For instance, the report might say “inventory was up this month because of the material we brought in for the elementary school job we’re starting on next month,” or “labor cost as a percent of revenue was up partially because the unit cost of materials was down, and partly because the mix of projects was more complex with more labor content.”
Stage 5: Strategic In this stage, monthly results are largely known before the month is out, and financial reporting contains a high degree of analysis and forms the basis for what to expect in the future. The finance function understands the microeconomics of the business and uses that understanding—along with real-time developments in costs, productivity, and project pipeline—to give insight into future concerns such as capacity utilization, cash flow issues, or upcoming product mix changes and their effects on margins.
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Think Strategically,
Kendall Hoyd and Sharon Hoyd